Service jobs heading offshore

originally appeared in USA Today:

The strike that crippled two of the nation's busiest shipping ports was settled this week, but the offshoring of service jobs — is expected to continue to grow as a trend across the USA.

The eight-day walkout by clerical workers at the ports of Los Angeles and Long Beach largely centered on the outsourcing of their jobs overseas and elsewhere in the U.S., says a spokesman for the International Longshore and Warehouse Union. Shippers denied outsourcing jobs, but the tentative settlement restricts the practice, according to the Associated Press.

Yet service companies have been sending jobs abroad in large numbers the past decade to cut labor costs — a trend that accelerated in the recession and is expected to continue the next few years before slowing after 2016. About 663,000 large-company jobs in information technology, human resources, finance and purchasing — the category that includes the port workers — have been offshored since 2002, according to The Hackett Group.

By 2016, the consulting firm estimates, another 375,000 jobs in the sectors will be moved abroad. More than a third of the U.S. jobs in those industries in 2002 will have moved offshore by 2016.

Most workers are employed directly by companies that previously used U.S. staffers, though some work for outsourcing firms. Hackett studied companies with at least $1 billion in annual revenue, noting they represent about 75% of the offshoring market.

India is the largest offshoring center. Service jobs also have gone to eastern Europe, the Philippines, China and Mexico.

In other sectors, initially low-level jobs were offshored, such as handling payroll or tracking purchase orders. Employers typically can cut labor costs by about 75%. In recent years, a growing number of higher-level jobs have moved overseas, such as benefits analysis and vendor management, though the cost savings for offshoring those positions is only about 25%.The trend took off after companies began contracting with programmers in India to help with the massive preparations for the Y2K computer bug in 2000, according to Hackett's research director.

He also indicated organizations now feel more comfortable moving up the value chain, noting, for example, that India's education system is improving and turning out top-notch job candidates.

Since 2005, legal services such as document review, contract drafting and regulatory communication increasingly have been offshored, particularly to India, according to the  managing director of Pangea3, a legal outsourcing firm. Indian attorneys handle work that in the U.S. is sometimes done by paralegals and at a 40% to 60% cost savings, he says.

Several thousand legal jobs have been offshored, estimates the founder of The LPO Program, a legal consulting firm.

In the current environment, it is more important than ever that … the support we provide to clients adds value without adding unnecessary cost, law firm Clifford Chance said in a statement.

Once services are offshored, there's little chance they'll come back to the U.S. according to The Hackett Group. By contrast, manufacturers have returned some production to the U.S. recently, largely because of a narrowing wage gap between the U.S. and China, rising shipping costs and falling U.S. energy costs — factors that generally haven't affected service jobs.

One exception: call-center jobs. About 500,000 were offshored from 2006 to 2010, according to the Communications Workers of America. Many have returned to the U.S. the last few years because of cultural gaps between representatives and customers that hurt sales, according to the senior partner of Boston Consulting Group.

Yet CWA spokesperson called the jobs that have come back a drop in the bucket.

Outsourcing No Longer ‘Dirty Word’ as Technology Spending Rises

Bloomberg

 

The Cleveland Police Authority in Northern England is paying Groupe Steria SCA to help manage the control room of the 2,200-strong force, allowing Chief Constable Sean Price to “concentrate on policing.”

The 211 million-euro ($295 million), 10-year contract to take calls, assist in preparing criminal case files and manage payroll, recruitment and expenses became effective Oct. 1. Price and other first-time customers seeking to simplify back-office operations or upgrade rickety computer systems are helping information technology services companies such as Steria, Cap Gemini SA and Cognizant Technology Solutions Corp. grow faster than the economies they serve.

“Outsourcing used to be a bit of a dirty word,” Price said in an interview. “I don’t think that’s the case anymore.”

France’s Cap Gemini and Teaneck, New Jersey-based Cognizant have raised their outlooks this year, while India’s Infosys Technologies Ltd. and Tata Consultancy Services Ltd. have signaled rising demand from corporate clients. The companies are gaining as corporations revive spending postponed by the global economic crisis while also looking to cap costs.

“IT is doing better than the economy,” Francois Enaud, chief executive officer of Velizy, France-based Steria, said in an interview. “The crisis forced companies in many industries to reconsider the way they do business and their cost model.”

About 53 percent of public- and private-sector organizations in Europe surveyed by Gartner Inc. plan to outsource more this year, while 40 percent plan to increase spending on IT services, the research firm said Sept. 7. Gartner also found that 14.7 percent of organizations with IT budgets of less than 1 million euros expressed interest in outsourcing, compared with 6.1 percent last year.

In the Cloud

The recovery in spending has been slower at large corporations, postponing the rebound at companies such as International Business Machines Corp., the world’s largest computer-services provider. The Armonk, New York-based company this month posted its third straight quarterly decline in new contracts. Its services signings fell 7 percent to $11 billion in the third quarter.

“Very large corporate IT projects of the type that IBM would get involved in aren’t recovering to the same extent as smaller pieces of work, which are more significant to smaller companies,” said Gianluca Tramacere, an analyst with Gartner in Milan.

These large contracts have traditionally been multi-year commitments with a fixed base of servers and personnel. While those are harder to come by, smaller companies are increasingly able to outsource some operations.

‘Pay as You Need’

That’s in part thanks to the spread of cloud computing services, which shrink the footprint necessary for upgrades to IT infrastructure by storing data and applications online.

Providers including Steria and Cap Gemini are promoting “pay as you need” cloud-based services, challenging the industry’s use of long-term contracts.

“The cloud should enable entry into these services faster,” for smaller companies, said Patrik Karrberg, a researcher in the London School of Economics’ Information Systems and Innovation Group. “The promise of the cloud is more flexibility.”

That’s helping cloud services grow faster than more traditional IT. Worldwide cloud services revenue is expected to reach $68.3 billion this year, up almost 17 percent from 2009, while overall global IT spending may rise about 4 percent, according to Gartner.

Emerging Markets

Tata Consultancy this month reported a quarter-on-quarter increase in revenue of 12 percent, the biggest jump in more than four years. Infosys raised its full-year revenue forecast to about $6 billion, compared with a July estimate of as much as $5.81 billion. Steria reported an 8 percent gain in third- quarter revenue to 402 million euros.

At Cap Gemini, Europe’s largest IT services provider, second-quarter revenue climbed 1.9 percent to 493 million euros in France and 6.6 percent in Asia, Latin America, and Europe outside of France, the U.K., and the Benelux countries. Sales in the U.K. and Ireland slid almost 9 percent.

Cap Gemini spent 233 million euros for 45 percent of Brazilian provider CPM Braxis in September. India’s HCL Technologies Ltd. and Wipro Ltd. have suggested they may do deals in Europe to expand their services on the continent.

In France, companies are “much more open to considering the outsourcing of non-core business” than before the economic crisis, Steria’s Enaud said.

Pent-Up Demand

Still, demand driving many corporate clients to spend more on their IT systems will eventually slow, some executives said.

“There was a surge in pent-up demand that we saw in the first and second quarter,” Cognizant CEO Francisco D’Souza said.

First-half revenue at Cognizant surged 35 percent to about $2 billion as deferred spending returned, the company said Aug. 3. Demand later in the year is unlikely to be “quite as strong, as we return to a more normal situation,” D’Souza said.

IT providers also face a battle to safeguard revenue from cuts in government spending in U.S. and Europe. In the U.K., the government said last week departments will cut their budgets by an average 19 percent over four years, with police budgets falling by 14 percent.

Longer term, the cost-cutting efforts may help computer services companies, said the LSE’s Karrberg.

“The problem for many governments it that they don’t have enough competent in-house people,” he said. “There will be a response among the providers to create more efficient services, and it’s a big opportunity at the moment.”

At the Cleveland Police Authority, meanwhile, Price is fielding queries from other police departments for the service contract he has with Steria.

“There’s going to be a huge amount of interest in partnerships like this,” he said. “So far we’ve had 29 police forces in England and Wales contact us to find out about what we’re doing.”